In July 2023 the Competition and Markets Authority fined Leicester City Football Club £880 000 for colluding with JD Sports. The club was found guilty of price fixing and restricting the selling of Leicester City-branded clothing in the UK. Evaluate the likely effects of collusion on businesses and consumers in an industry of your choice. Illustrate your answer with reference to game theory. ................................................................................................................................................................................................................................................................................

Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:
- QS4: Construct and interpret a range of standard graphical forms.
- QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
- Collusion occurs when businesses agree to cooperate in their pricing and output policies
- This occurs when the market is an oligopoly and enables the businesses to act as a single business to fix prices and limit output, such as JD Sport and Leicester City Football Club

Effects on businesses
- Game theory suggests that the businesses can benefit from collusion by maximising joint profit e.g. in the following diagram the firms can make a joint profit of \(£ 40\) as shown in the diagram
- The collusion may create barriers to entry to the market that enable the firms to restrict competition, such as limiting the supply of Leicester City sportswear
- Collusion reduces unpredictability and uncertainty in the market as prices and output are guaranteed. This may lead to increased investment as the level of risk is reduced

Effects on consumers
- Economic inefficiency causing higher prices: as prices are set above competitive levels this would lead to a deadweight loss in the economy
- Price fixing leads to a fall in allocative efficiency and economic welfare and to a fall in consumer surplus
- Reduced competition resulting from collusion may limit product choices for consumers

Effects on other businesses in the industry
- Collusion is likely to limit the ability of non-colluding firms to compete on price, quality, or innovation
- Pressure exerted on suppliers to maintain high input prices or engage in collusive behaviour themselves

NB: If no reference to game theory candidate can achieve a maximum of level 3
Candidates must include effects on both businesses and consumers to achieve a level 4
Accept advantages as KAA and disadvantages as evaluation or vice versa
Evaluation (8 marks) - indicative content
Evaluation
- Benefits are more likely to apply to businesses that collude rather than consumers because the producer surplus is rising at the expense of the consumer surplus
- Benefits to businesses may occur in the short-run only, if one or more colludina businesses break awav from the aareement
- Collusion may be illegal. If caught the business may have to pay a fine and face damage to its reputation e.g. Leicester City FC having to pay £880 000
- The increase in supernormal profits of the colluding businesses may allow for greater dynamic efficiency as they have an increased ability to invest in quality and choice for consumers
- Price stability will enable consumers to plan future expenditure
- Effect on consumers depends on the value of PED. For example, if substitutes are available the impact will be reduced
- The entry of new firms into the industry may break existing collusive agreements
- Unstable market dynamics because the collusion agreement can break down at any time. When this happens, it can lead to sudden price wars
- Some forms of collusion may be beneficial to both producer and consumer e.g. R\&D cost savings and efficiencies or developing improved industry standards